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Risk Neutral Modeling for Economic Scenario Generation: In Theory and Practice

This white paper explores the theory behind and practice surrounding Risk Neutral Modeling for Economic Scenario Generation (ESG). In addition to laying out the foundations of the Risk Neutral Measure and Fundamental Theorem, this study also sets forth several practical case study examples that demonstrate the importance of risk neutral modeling and joint calibration in market consistent valuation, regulatory reporting, risk and capital forecasting-and the overall enhancement of a firm's risk management